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Singer’s Elliott Pounces on World’s Second-Largest Distiller

(Bloomberg) -- Billionaire Paul Singer’s Elliott Management Corp. pounced on another European corporate icon, building a stake in Pernod Ricard SA in an effort to boost returns and sharpen governance at the world’s second-largest distiller.

The activist firm wants the French company to lift profit margins at least to rival Diageo Plc’s levels, saving 500 million euros ($567 million) a year by eliminating back-office duplication, cutting jobs in France and the U.S. and other measures, people familiar with the situation said.

Eventual options could include pushing for a sale of the company, which has a market value of nearly 40 billion euros, said the people, who asked not to be identified discussing confidential matters. Elliott has no intention of mounting a proxy contest, they said.

Shares of the owner of Jameson Irish whiskey rose as much as 5.8 percent in Paris, the biggest gain since 2010, after Elliott said it held more than 2.5 percent. The announcement comes just days after people familiar with the situation said the firm accumulated a stake in Germany’s Bayer AG to press management to consider a split.

Pernod Ricard offers one of the industry’s most attractive investment opportunities because its “inadequate corporate governance and a lack of outside perspectives” have led to lackluster performance, Elliott said. The firm cited the disappointing takeover of Absolut vodka and operating margins lower than those of Diageo.

Pernod said it has lifted sales and profits over the past year with growth across regions and product categories. Chief Executive Officer Alexandre Ricard said the company has created more than 11 billion euros of value over the last three years, with a 38 percent share-price increase that’s outperformed France’s CAC 40 index of large companies and the Stoxx 600 Food & Beverage index of European peers.

“We are a group with strong family values committed to long-term value creation,” he said in a statement. “Our strategy is working and is the right one, combining short-term profitability and sustainable, profitable and responsible growth under a consistent and long-term road map.”

Facing off with Elliott ramps up the challenges facing the CEO, the third member of the co-founding Ricard family to run the company in as many generations. Elliott’s arrival is one of the biggest potential threats to the ownership structure since Ricard merged with Pernod about four decades ago, bringing together France’s best-known makers of the anise-flavored spirit known as pastis.

The family is the largest shareholder, with a 16 percent stake and 22 percent of voting rights -- not enough to block a deal though it could help in mounting a defense. Other big shareholders include Groupe Bruxelles Lambert, the investment firm formerly headed by the recently deceased Albert Frere, and Caisse des Depots et Consignations, which invests for the French state.

France wants domestic companies like Pernod Ricard to have “stable and long-term” shareholders rather than be placed under pressure for the sake of short-term profitability, a Finance Ministry official said Wednesday.

Cutting Costs

Elliott sent a letter to the company in early November to inform it of an initial stake that it has since increased, according to a person familiar with the situation. Representatives of the firm met with CEO Ricard later that month. In addition to urging cost cuts, the firm is said to have expressed its concern about market-share losses in vodka. Elliott declined to comment beyond its statement.

France’s market authority requires investors to disclose their stake in a company once it reaches 5 percent of the free float. Elliott opted to go public with its holding in order to be transparent in discussions with other stakeholders, according to a person familiar with the firm’s thinking.

Elliott has taken stakes in European industrial titans such as Thyssenkrupp AG and engineering firm GEA Group AG. It has also halted a restructuring plan at South Korea’s Hyundai Motor Group and is locked in a fight with media conglomerate Vivendi SA overboard control of Telecom Italia SpA, where the French company is the largest shareholder.

While U.S. activist firms are looking to Europe for fresh targets, French law can make proxy fights difficult, according to Kai Liekefett, a partner at the Sidley Austin law firm in New York.

“I think Elliott will be surprised how difficult it is to run a campaign in France,” he said.

Family Ties

A sale of Pernod Ricard “appears to us to be wishful thinking,” Sanford C. Bernstein analyst Trevor Stirling said in a note. Management has already been making progress on the issues identified by Elliott, squeezing out costs for several years, he said.

A majority of the supervisory board has Ricard family ties. Elliott plans to push the company to appoint a more diverse and international board, a person familiar with the situation said. Shareholder advisory firm Glass Lewis & Co. has noted that eight of Pernod Ricard’s 11 board members are either affiliated with the company or insiders, and that the CEO and chairman roles aren’t separated.

“You have a classic case of a business that could show a lot more today, if they chose to,” said Tom Russo, who manages assets worth $12 billion at Gardner Russo & Gardner including about $850 million worth of Pernod Ricard shares. “I still think our best course of action is to invest meaningfully at the expense of operating margin today for more wealth tomorrow.”